I just returned from an amazing vacation – a cruise of the Mediterranean. We started in Athens, Greece; spent just a couple days there enjoying the history, and then boarded our ship. The cruise took us to the Greek isles of Santorini and Crete, and then we sailed to Italy, the beautiful St. Tropez, France, and finally Barcelona, Spain. We finished our vacation by sampling many, many tapas and wines in Barcelona. About midway through our vacation, I found myself wondering – how could I do U.S. multistate tax consulting somewhere in Europe? I’m still working on that angle, and will certainly keep you posted.
But meanwhile, on the flip side of that equation, we’ve been engaging with several foreign companies who have U.S. operations and find our state tax laws to be, well, challenging! As I tell all my foreign clients – trust me, they are challenging for U.S. companies too! Here are some of the main things for foreign companies to think about as they begin doing business in the U.S.
Concept of nexus – Nexus is the minimum contact a company must have with a state in order for the state to be able to impose its tax laws on the company. Once nexus is established, the company may be subject to the filing of income tax returns, the collection and remittance of sales tax and filing of returns, employer payroll taxes and employee withholding, and myriad other taxes which may be imposed by the state or local entities. A challenge that some foreign companies face is that they don’t realize how many different state and local agencies there are (in addition to the U.S. federal government).
“Registering” in a state can mean different things – Clients (domestic and foreign) often tell me that they have “registered” in a state. My next question is “what have you registered for?” A company can register its legal entity name for legal purposes with the state’s Secretary of State. And it can register with the Department of Revenue for income tax purposes and/or sales tax purposes. These are generally separate registrations. A company can also be registered with the state for unemployment tax purposes. One might think that the states cross check these different registrations and call out companies who are registered with one agency but not others, but we find that that is not always the case. So, know what you are registered for!
Federal law doesn’t rule – state statutes do. As it stands today, the U.S. federal government generally does not dictate what the states do with respect to sales tax or income tax, provided the state’s laws are constitutional and do not double tax or discriminate. (OK – this may be an over-simplification and there are some multi-state scholars out there who will take issue with this broad statement – so my apologies!) But, what the foreign company needs to be aware of is that, indeed, each state is sovereign and can make its own laws with respect to taxes. So, for instance, that’s why for sales tax, an item may be taxed differently in some states than in others.
Each state has its own taxability statutes. Individual items may be taxed differently from state to state. For example, many of our clients are in the software or SaaS space, and states vary in their treatment of these items. Several states now tax the SaaS revenue stream, including Arizona, Massachusetts, and New York (to name a few). However, states including California, Florida and Georgia do not tax the SaaS revenue stream. And Texas taxes it at 80%! In many states, food products sold in grocery stores are subject to an exemption, but not in all states. And the taxability of medical devices, prosthetics, and drug products vary from state to state as well. Many of our foreign clients are surprised that there would be so much variation among the states – but remember, they are sovereign!
Things are changing almost daily – State tax laws are based largely on principles that made sense many years ago when most of our economy was product based. Now, so much of our economy is services based and the state tax laws simply haven’t kept up. Nor have they necessarily kept up with the changes in technology. Silicon Valley is creating technology products and services almost daily that don’t fall neatly into some of the existing state legislation surrounding sales tax. Currently many states are passing legislation aimed at taxing more of the services and internet economies. Unfortunately, some of those laws are unfair and fly in the face of established precedents. Taxpayers are likely to litigate these items in court, but from a practical matter, it can be frustrating for companies to know how to apply the laws and whether or not to abide by them. Also, the federal government is continually reviewing how (and whether) it should get involved in the online sales tax debate. Several forms of proposed federal legislation are floating around Congress (and have for years), but have not passed. So, we continue to wait and talk about it – and help our clients navigate the current environment. But we do anticipate that sometime soon, the entire landscape for sales tax may look very different.
Sales tax is not really like VAT. Sales tax is an indirect tax, similar to the Value Added Tax. But that’s where the similarities end. Unlike VAT, sales tax is shown as a separate line item on receipts and is added to the posted price of the product (generally). And as mentioned above, it is administered by each state (and sometimes local) jurisdiction. There are certain exemptions in sales tax, to avoid double taxation (for instance, resellers can get an exemption on items they purchase for resale), but documentation of those items is key in the process. Keeping a “paper trail” in case of audit is very important.
It’s all Greek to some U.S. companies too – you’re in good company. While this article is aimed at foreign companies beginning to do business in the U.S., many U.S. companies have questions about these things as well. (And I expect my phone to ring from some of them as well!) The U.S. income tax laws are quite cumbersome and then sales tax is quite complex as well. That’s why it’s important to hire a specialist in multi-state tax issues if you plan to do business in many states. Most CPAs in general practice don’t specialize in the nuances of sales tax – they tend to be more familiar with the income tax laws. We assist our clients at the beginning of their voyage into U.S. state tax issues and also if they come to us once they’ve been here for a while and have perhaps made some missteps. Again, you’re in good company. It’s so hard to keep track of all the state laws. Our job is to make sure you stay in compliance with as many of them as possible and still have time to do the main thing you came here to do – generate sales for your company and help it grow here in the U.S.
We’re excited to have you! Now, let us know how we can help.